The Four Real Estate Market Cycles and the Strategy for Each

The Four Real Estate Market Cycles and the Strategy for Each

Flippers and landlords need to understand the four basic residential real estate cycles to tailor their investment strategy.

1.)     Declining market. This is defined by increasing unemployment, a longer time on market of homes for sale, stagnant or decreasing sale prices, decreasing construction of new homes, modest increase in foreclosures, and perhaps a noticeable increase in crime.  Flipping into a declining market is a risky strategy, as market values are falling and the amount of inventory is increasing.  Savvy investors may choose to liquidate their non-rental properties early in a declining market to recoup capital for later in the cycle.  Flippers should keep their expenditures under control and attempt to sell quickly.  One wise strategy is to selectively buy income-producing residential properties with the intent to hold onto them for many years.

2.)     Trough.  This is defined by high unemployment, a long time on market of homes for sale, a dramatic increase in foreclosures, possibly a higher crime rate, an increased number of renters versus home buyers, an abundance of bad news about the real estate market as reported by the media, very little land development, and a lull in new home construction.  The trough is the market cycle where the most millionaire real estate investors are created.  Speculators and novice investors typically do not buy during this cycle, leaving little competition for savvy real estate investors.  The best strategy in the trough is buy-and-hold.  Flippers may choose to perform a “slow flip,” in that they improve a property, rent it for a few years, and then sell into a stronger market.

3.)     Rising market.  This is defined by an increase in jobs, an increase in number of sales, possibly a crackdown on crime, new government housing grants and programs, an increase in new home construction and land development, a decrease in foreclosure filings, and a slow but steady rise in home values.  Speculators and move-in home buyers start buying en masse, adding fuel to the market.  Both the fix-and-flip and buy-and-hold strategies work well in a rising market.  The investors who purchased during the trough realize significant wealth during the rising market.

4.)     Peak market.  This is defined by low unemployment figures, abundant new home construction and land development projects, relatively few foreclosures, and euphoric housing news as reported by the media.  During the peak market, many people will leave their day jobs to become mortgage brokers, real estate agents, home builders, flippers, or other real estate-related professions.  Housing prices in this market typically outpace any rent increases, and there are fewer renters due to many people choosing to buy a home.  A great strategy is to fix-and-flip, although increased competition and rising prices makes it hard to find a deal.

When you know what market you are in, it is time to prepare for the next market cycle.  A shift could be just around the corner.

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